Hi Forum. In deriving optimal monetary policy rule, the loss function is minimized subject to Dynamic IS equation and NKPC. Is it possible to derive the optimal rule and don not use IS equation in the simulation due to some problems? I mean I have derived the rule with respect to IS equation and NKPC . But in simulating the model I have to omit the IS equation in the model.

best regards

Sorry, but your question is unclear. What do you mean with

What are the problems?

Hi Mr professor Pfeifer

the problem is due to collinearity between Y (output gap) and consumption euler equation.

best regards

That sounds strange and usually indicates a more fundamental problem.